It has been announced that starting on January 1, 2018, Canadian homebuyers will meet stiffer guidelines in order to qualify for a mortgage with a federally regulated mortgage lender.
According to the Office of the Superintendent of Financial Institutions Canada, it was confirmed October 2017, that starting next year, all borrowers;
- even those who have down payments of 20% or higher and do not require mortgage insurance
- will need to qualify for mortgages that are two percentage points higher than the rates at which they are applying.
This would apply to both variable and fixed-rate mortgages, regardless of the term.
The “stress-test” means that homebuyers will have to qualify for mortgage loans at the higher of the Bank of Canada’s five-year benchmark rates. The current rate of 4.89% or the mortgage rate offered by their lender plus 2% points.
Old Rules: Assuming a 20% down payment, 5 year fixed mortgage rates of 2.84%, and 30 year amortization: a family with an annual income of $100,000, can afford a home worth $693,405.
New Rules: Applying the new “stress test”, the family must qualify for the mortgage using the greater rate of 4.89% and 4.84% (2%+2.84%).
Therefore with 20% down payment, a 5 year fixed rate of 4.89% and 25 year amortization; the family can afford a home worth $591,537. The difference is that under the new rules, the family’s affordability has dropped by $ 101,868 (-15%). A bank that was willing to lend them $700,000 before is now only able to loan them approximately $600,000.
From the article in Savvy New Canadians-Personal Finance for Canadians -Stricter Mortgage Rules for 2018 and How they will Affect Home Buyers By Enoch Omololu
Government-backed insurance requires the banks to run income stress tests on borrowers.
What the “stress-test” accomplishes is that it ensures homeowners can afford to pay their mortgage loans even if rates go up.
The new rules were developed to decrease the risks for households with high levels of debt as interest rates rise. RBC said these risks will likely decline long-term as a result of the measures. In the short term, the new rules have the potential to “rock the market”. Non-insured mortgages represent a high percentage of the total mortgage market; the bank said 45% of mortgages at domestic banks are currently uninsured.
What we may see as a result of the new rules is
- An increased demand for homes for sale in November and December 2017. People with pre-approved mortgages will rush to close before Jan. 01, 2018.
- Increased activity in the category of lower priced homes and the less activity for higher priced properties.
- New home buyers will qualify for less.
- The rise in house prices is likely to slow down considerably, particularly in Vancouver and Toronto.
- There is bound to be an increase in patronage of lenders not federally regulated, like credit unions.
The impact on the housing market may depend on how many borrowers will ‘migrate’ to non-federally regulated mortgage lenders. They will not be subject to the new OSFI rule
The banks cannot lend more than 80 per cent of a property’s value, even to those with good, solid credit, without the borrower obtaining government-backed insurance.
RBC still expects a soft landing for Canada’s housing market.
There will be many different opinions about the hassle of the new mortgage rules, but I chose to be an optimist. It is always advantageous to have a healthy and stable housing market. People want to invest in a home and property they can comfortably afford. We all saw what happened in the States when banks would lend any amount to anybody. It was a disaster.